Question 1

Which of the following best explains why the kinked demand curve leads to price rigidity in oligopolistic markets?

Accepted Answer

Firms believe that if they raise prices, competitors will not follow, causing a loss of sales; if they lower prices, competitors will follow, preventing sales gains.

Question 2

In the kinked demand curve model, what happens to marginal revenue ($$MR) at $$the kink?

Accepted Answer

$$MR is $$discontinuous at the kink.

Question 3

Suppose the marginal cost ($$MC) $$curve shifts upward but remains within the discontinuous portion of the marginal revenue ($$MR) $$curve in the kinked demand model. What is the likely effect on price and output?

Accepted Answer

Price will remain the same, and output will remain the same.

Question 4

Which of the following is an example of price signaling in an oligopolistic market?

Accepted Answer

A firm announces a price increase in a press release, hoping others will follow.

Question 5

In the dominant firm model, how does the dominant firm determine the price to maximize its profit?

Accepted Answer

By setting price where its marginal revenue ($$MR_d) $$equals its marginal cost ($$MC).$$

Question 6

Which of the following conditions is necessary for a cartel to succeed?

Accepted Answer

There must be a stable organization and potential for monopoly power.

Question 7

If a cartel member cheats by secretly lowering its price, what is the most likely outcome?

Accepted Answer

The cheating firm will gain market share, but the cartel may collapse.

Question 8

Which of the following best describes price leadership?

Accepted Answer

One firm sets the price, and other firms in the industry follow by matching it.

Question 9

Given the kinked demand curve, if the current price is $$P^*$$ and marginal cost increases from $$MC_1 to$$ $$MC_2 ($$within the discontinuity), what will happen to the equilibrium price?

Accepted Answer

The equilibrium price will remain at $$P^*.$$

Question 10

In the dominant firm model, what is the residual demand curve?

Accepted Answer

The market demand curve minus the supply of fringe firms.

Question 11

Which of the following is NOT a reason for price rigidity in oligopolistic markets?

Accepted Answer

Firms are required by law to keep prices constant.

Question 12

Suppose three firms in an oligopoly are currently charging $$10. Firm A raises its price to 15 $$and announces it publicly. What is this an example of?

Accepted Answer

Price signaling.

Question 13

If a dominant firm sets a price above the competitive equilibrium, what is likely to happen in the long run?

Accepted Answer

Fringe firms will increase their output, reducing the dominant firm's market share.

Question 14

Which of the following best describes a cartel?

Accepted Answer

A group of producers that explicitly agree to cooperate in setting prices and output levels.

Question 15

If the dominant firm's marginal cost ($$MC) $$increases, what is the effect on the market price in the dominant firm model?

Accepted Answer

The market price will increase.

Question 16

Which of the following is a real-world example of a cartel?

Accepted Answer

OPEC (Organization of the Petroleum Exporting Countries)

Question 17

In the kinked demand curve model, what is the main reason firms do not change prices even when costs change?

Accepted Answer

The marginal revenue curve is discontinuous, so small cost changes do not affect optimal price.

Question 18

Which of the following statements about price leadership is FALSE?

Accepted Answer

All firms in the industry independently set their own prices.

Question 19

If a cartel cannot enforce its agreement among members, what is the most likely outcome?

Accepted Answer

The cartel will break down as members cheat.

Question 20

Which of the following best describes the supply response of fringe firms in the dominant firm model?

Accepted Answer

Fringe firms supply the difference between market demand and the dominant firm's output at the market price.

Oligopoly: Kinked Demand Curve, Price Leadership, and Cartels

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